7 habits of the financially savvy

The difference between financially stable individuals and those who seemingly grapple from pay-cheque to pay-cheque invariably has less to do with inherited trust funds or perfectly-timed stock market winnings, and more to do with a set of financial disciplines followed by the financially astute few. It also has precious little to do with intelligence if one considers that investment industries the world over are literally flooded with would-be investors who may be mathematically gifted but financially specious. After many years of providing financial advice to clients of all income brackets and net asset values, there is strong evidence to suggest that these are the signature seven habits of the financially stable:

1. They know where they’re going

The first step towards financial freedom is defining your end-point and determining exactly what you wish to achieve financially. Financial goals should be all encompassing, ranging from the home you live in, where your children will be educated, what cars you drive, your medium-term vacation goals, high-cost purchases, as well as your longer-term retirement plans. No single goal is mutually exclusive, and financially stable people appreciate that whatever they spend today can have a significant impact on their assets ten years from now. Financial goal-setting is and always will be a balancing act between what we want or need in the here-and-now, and what we are prepared to delay gratification for. In the wise words of Yogi Berra, “if you don’t know where you are going, you’ll end up someplace else.” Without a clearly defined set of financial goals, that “someplace else” may not be the destination you had in mind but never bothered to plan for.

2. They have a map

A written financial plan is, in essence, a road map which provides exact directions on how to achieve your goals. A common denominator amongst those who are financially savvy is that they generally tend to know both (a) where they’re going and (b) how they’re going to get there. Unsupported by a clearly defined road map, financial goals remain nothing more than somewhat interesting and aspirational dreams as directionless as Alice in Wonderland when she asked the Cheshire Cat, “Would you tell me, please, which way I ought to go from here?“. “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where.” said Alice. “Then it doesn’t matter which way you go,” said the Cat.

3. They understand and harness the power of compound interest

Also known as the seventh wonder of the world, for the financially uneducated the sheer wonder of compound interest can never fully be appreciated. The most financially stable people are those who started saving from their first pay-cheque and never interrupted the magical cycle of compound interest. The maths is frighteningly simple: if you’re 40 years old today and plan to retire when you’re 65, you have another 300 pay-cheques available to invest for your retirement years. Whilst your retirement funding shortfall may appear alarmingly large right now, there’s no doubt it will appear near insurmountable this time next year unless you take immediate action. In the words of Karen Lamb, “A year from now you may wish you had started today.”

4. They follow a budget

Far from perceiving a budget as a tool of the frugal or a measure of austerity, those that are financially savvy understand that a budget is in fact an enabler of financial freedom. A budget provides essential insight into how much money you’re earning, what you’re spending it on, how much you’re able to save and what you’re able to channel towards what’s really important to you. When it comes to finances, there’s nothing blissful about ignorance, and knowledge really is power.

5. They live within their means

Whilst a budget may tell you what you can’t afford, it doesn’t have the power to stop you from buying it – and financially stable people understand this. In general, financially stable people understand the combined power of delayed gratification and compound interest, and the massive effect these two factors can have on their futures. There’s absolutely nothing undignified about living below one’s means. In fact, Calvin Coolidge once remarked, “There is no dignity quite so impressive, and no one independence quite so important, as living within your means.”

6. They protect the downside

While you are able to work, your single greatest asset is unquestionably your ability to generate an income. All your financial goals – whether short, medium or long term – are dependent on your ability to earn money over the period of your working life. Financially responsible people understand the importance of protecting their incomes against unforeseeable risk. If you’re earning an income, make sure you have an appropriate income protection benefit that will replace your income in the event of illness or disability, and secure your retirement funding in the long term. Those who are financially secure understand risk, take calculated risks and protect against unforeseeable risk.

7. They educate themselves financially

When it comes to managing one’s finances, remaining financially astute and educated is vital. In fact, in the words of Benjamin Franklin, “If a man empties his purse into his head no one can take it away from him. An investment in knowledge always pays the best interest.” Whilst one may seek advice from a financial planner, those who are financially astute take personal responsibility for their finances and retain full control over their affairs.

There is simply too much empirical evidence to deny that these seven habits practiced by financially stable people the world over really do result in personal financial freedom. Our advice is to put these habits into practice today and reap the rewards of a financially fulfilled destiny.